The surge in the benchmark U.S. Treasury 10-year note yield to three month highs in the past week could be giving a thumbs up to equity investors despite the implied rise in the cost of capital from a steeper yield curve.
Stock-market bulls say the torrid bond-market selloff suggest the winds are turning in favor of the reflation trade as optimism about progress on a phase-1 U.S.-China trade deal, and some bottoming out of the decline in the manufacturing sector, have helped push benchmark stock indexes to record highs.
“People were buying bonds in anticipation of a bigger global slowdown, and now there’s greater confidence that the global economy is not moving into a recession,” said Kate Warne, investment strategist for Edward Jones, in an interview.
Up to now, the fall in the 10-year yield to a three year low in August has reflected a pessimistic perception of the global economy’s health, casting doubt on the sustainability of the U.S. stock market’s run-up this year.
The mid-year brief inversion of the U.S. yield curve, when short-term interest rates rose above yields on longer dated debt, unsettled stock-market investors who were aware of the tendency for this bond-market phenomenon to predict an economic downturn.
But with the yield curve now showing a positive slope, investors say the recession signal sent out by the bond-market has faded.
“Maybe we were at peak pessimism at the end of August. The bond-market built too much into this worst-case scenario,” said Marvin Loh, senior macro strategist at State Street, told MarketWatch.
Igniting this week’s bond market selloff, a raft of news reports said the U.S. and China had agreed on a general framework for a phase-1 trade deal which would